Ghanaian households and businesses expecting another policy rate by the MPC to induce a further drop in lending rates may have to revise their notes and lower expectations, as an economist has suggested that another cut is very unlikely.
Already, businesses are celebrating the 350 basis point reduction in the policy rate in the last meeting, which was induced by the downward trend of inflation. The policy rate cut has positively affected the Ghana Reference Rate, and it is expected to reflect positively in the average lending rates.
Amid the latest development, inflation has further returned to a single-digit, according to the latest Consumer Price Index (CPI) published by the Ghana Statistical Service (GSS). The latest 9.4% single-digit inflation has sparked a new wave of optimism among the business community of another possible cut in the policy rate to further cool lending rates.
But an economist at Academic City University, Dr. Paul Appiah Konadu, is cautioning against such optimism, warning that another policy rate cut by the Bank of Ghana is highly unlikely in the near term.
According to Dr. Konadu, while inflation has impressively dropped below the government’s end-of-year target, reaching single digits in September, the current macroeconomic environment calls for restraint rather than further monetary easing.
He explains that there are inflationary threats that the Bank of Ghana must look out for, and hence it may not be advisable to cut the policy rate again in the next meeting. He maintains that the cedi is depreciating, utility tariffs are hiking, and the economy is heading towards the festive season, which is going to result in high spending.
These conditions, he says, do not warrant another policy rate cut in the near term.
“Inflation has already fallen below the end-of-year target. That was 11.9% and we are already doing single digits in September. Meaning, if things continue with the trend in the past months, we can even hit 8%. The Bank of Ghana was a bit conservative in cutting the policy rates from the beginning when inflation started falling,” he analysed.
He further observed, “I do not expect that after cutting it by 350 basis points, they would cut it further. And especially given the recent depreciation of the cedi, you know, that will have inflationary pressures going into the festive season. And so, I expect the Bank of Ghana to maintain the policy rates, maybe till the end of the year.”
The policy rate, which is a key tool the central bank uses to influence the cost of borrowing and manage inflation, currently stands as a critical anchor for Ghana’s disinflation efforts. Dr. Appiah Konadu argues that a hasty cut could “throw the economy out of gear.”
Should another policy rate cut happen, the lower interest rates can make loans cheaper and stimulate business activity; they can also fuel spending and weaken the cedi, especially when external conditions, such as rising import bills or festive demand, begin to exert pressure.
For now, despite the drop in inflation, Dr. Konadu says the macroeconomic recovery requires balance. Too much stimulus, he fears, could undo the progress painstakingly achieved through fiscal discipline and tight monetary policy.
Given the situation, the economic managers face a delicate trade-off of keeping growth alive without reigniting inflation.
